DISAPPEARING CASH

Australians experienced two contradictory trends during the pandemic: At its start we withdrew a lot of banknotes – mainly in $50 and $100 denominations – stuffing them under our mattresses. That trend continued all the way through to the beginning of 2023, when the RBA estimated that somewhere around one hundred billion dollars in banknotes have been squirreled away in Australian homes. That’s a lot of cash for an increasingly cashless society.

At the same time that Australians buttressed their cash fortresses, the banking system underwent a fundamental shift away from branch and ATM-based services, taking a leap into ‘vapourised’ digital banking. Already on the decline, the number of branches dropped precipitously; many branches closed for the pandemic and never reopened, or reopened on a much more modest basis. ATMs can still be found at those now-reduced branches, but have largely vanished from public spaces.

It seems as though there’s a behavioural tug-of-war going on between Australians hoarding cash as a store of value, and how we’re actually using cash – that is to say, hardly at all. We ceased using banknotes and coins en masse in April 2020, as people came to believe that money touched by many other hands could be carrying the SARS-CoV-2 virus. Everything suddenly went touchless and cashless. That’s
largely persisted – although plenty of small businesses do still accept cash, most larger businesses clearly favour cashless transactions.

ANZ recently made it official, announcing they’d cease facilitating withdrawals and deposits of cash from some of their branches. That toe in the water looks to be a test case for the rest of the Big Four: if it goes well for ANZ, we can expect all of them to migrate away from banknotes over the next few years.

And then what?

Before answering that question, it may be useful to examine the mechanics of Australia’s ‘cashless’ economy. A decade ago, the RBA began its efforts to create a ‘New Payments Platform’ (NPP), designed to provide a fast-settlement network for transaction-based banking. Five years later, NPP launched with PayID, and has slowly been replacing forty-year-old transaction banking services (such as BPAY) with fast and secure modern equivalents. All of the infrastructure supporting the NPP operates so seamlessly and efficiently that it creates the impression of a ‘digital’ financial system, where digital dollars float from payer to payee.

That’s how we might want to think of it – but NPP operates nothing like that. It is nothing more than the latest-and-greatest version of transaction banking, facilitating the movement of money between accounts throughout Australia’s banking system. When I send a friend a few dollars via PayID to pay for a movie ticket, that money is not flowing from my smartphone to his; it’s flowing from my bank account to his, using account information (PayID) provided by my smartphone.

NPP has proven itself both fast and cheap – when it works. But there’s the rub. Where the networks don’t reach – say, the middle of the Outback – or where the network fails (as they do in a bushfire, flood, or cyclone) – the entirety of NPP-based transaction banking vanishes. Without the network, NPP can’t operate. A cashless Australia is a network-dependent Australia. For that reason our telcos and Big4
invest a lot of money into infrastructure and resilience.

This is the true price of a cashless nation. There’s no such thing as a free lunch: sure, ANZ may save some money when they abandon banknotes (and their security risks) but they also take on new infrastructure and cybersecurity costs. It’s not yet clear to anyone whether this is makes good economic sense – but neither does it make sense to fight the cashless future.

Does that future look like more-of-the-same transactional banking, with faster settlement times? Or is there scope for something completely novel? We know the RBA has been quietly testing a ‘digital dollar’ – a technology that sits uncomfortably between the wild anarchy of cryptocurrencies like Bitcoin and Ethereum and the tried-true-and-boring NPP. At the moment the RBA sees it only as a mechanism to
speed settlements between banks; a consumer-facing digital dollar, although mooted periodically (and the focus of an experiment by ANZ) seems very far away.

Why? The big problem facing any ‘central bank digital currency’ (CBDC) is the same problem facing transaction banking: scale. Where the NPP demands high-speed and highly-resilient network connections to high-uptime computing resources – something we know how to do well – CBDCs take computing where it’s never gone before, with massive, continuous, parallel reconciliation of public ledgers. Every organisation or individual working with a CBDC has to maintain (or at least continuously reference)
their own holdings against these ledgers, in order to be able to truthfully assert that their digital dollars have not been counterfeited.

China’s ‘digital yuan’ does this by simply referring every transaction made in the currency back to the People’s Bank of China. As the ultimate authority, the PBoC can decide – on an arbitrary basis – whether your money is any good. None of the other CBDCs being trialed (there are many, including Japan, India, the USA, SIngapore, and the EU) would centralise monetary authority in this way, making the problem of authenticating digital currencies much harder. Yet it’s unlikely that any individual or business would want to be the bearer of any currency that could be arbitrarily ‘canceled’ by a central bank.

The roadblocks preventing a wider deployment of CBDCs will be solved; there’s too much need and plenty of smart folks working on these problems. But it’s likely going to take the rest of this decade before those problems find solutions both tested and trustworthy enough to risk them on more than a tiny portion of the financial system. Until then, we have a transaction-based financial system, via NPP, that looks digital on the surface, but still works the same old way. It works – and that’s a big plus – but it points backward. As CBDCs displace transaction-based banking, services that are very difficult to deliver at scale today – such as customised investment and savings advice – become far easier. Banks will be running to keep up.

At that point banknotes will begin to feel quaint, more like ‘screenshots’ of a financial system than where we’re now headed: an all-singing, all-dancing spectacle of money in motion, hard at work for us – even when we’re not thinking about it.